site.btaGrowing Deficit in State Public Insurance Budget Threatens Bulgarian Public Finances

The growing deficit in the state public insurance (SPI) budget poses a risk to the fiscal sustainability of the social security system and, consequently, to public finances as a whole, according to an opinion of the Fiscal Council of Bulgaria on the report on the implementation of the SPI budget for 2024.

The Fiscal Council notes that in its opinions, the Council has repeatedly warned of the long-term negative impact of the measures taken in recent years to increase pension income.

The opinion notes that the SPI budget deficit continues to grow, now reaching BGN 11.522 billion (5.68% of GDP), while the coverage of expenses with insurance revenues is 52%.

The budget implementation is close to the values set out in the law regulating the SPI budget for 2024, with a minimal over-implementation reported in both the revenue and expenditure sections. The over-implementation in the expenditure section is mainly due to social assistance and benefit expenditures.

The reported expenditure amounts to BGN 24.621 billion (12% of GDP), with the Pension Fund alone accounting for 80% of total expenditure, and total pension expenditure reaching 10.7% of GDP.

The main parameters show an improvement compared to the expected values for the average insured income and the number of insured persons. This is the basis for the 1.2% over-performance of revenue from insurance contributions.

The 14.5% increase in average insured income compared to 2023 is due to the increase in the minimum wage as well as the minimum insurance income for self-insured persons by 20% to BGN 933, the increase in the maximum insurance income by 10% to BGN 3,750, and the increase in the remuneration of teaching staff and others in the budgetary sphere, the opinion says.

The Fiscal Council notes that pension incomes are rising rapidly in nominal and real terms - the average pension increased by 12.5% in 2024 and reached BGN 833 (a real increase of 9.7%). The faster growth rate of the average insured income compared to that of the average pension leads to a slight decrease in the gross income replacement rate to 53.3, the Fiscal Council notes, summarizing that the ratio is close to the EU-27 average (54.8) and above the OECD average (50.7), even though the ratio of pensioners to insured persons in Bulgaria is twice as high - 0.72 compared to an average of 0.35 for the EU-27 and 0.31 for OECD countries. This shows that the policy of increasing pensions with state transfers beyond the capacity of the pension system without the necessary reforms is unsustainable in the long term and makes it heavily dependent on tax revenue transfers, the Fiscal Council notes. The Council points out that this undermines the principles of social security and severs the link between the personal contribution of insured persons and the pension income they receive.

The opinion also notes that social assistance and benefit expenditures increased significantly in 2024 - by 18%, compared to 7.5% in 2023.

The opinion was prepared in accordance with the Law on Fiscal Council and Automatic Correction Mechanisms, which requires the Fiscal Council of Bulgaria to prepare a reasoned opinion on the report on the implementation of the state public insurance budget. The Council prepares reasoned opinions and recommendations on all strategic documents relevant to compliance with numerical fiscal rules.